WiFi for America’s Heartland — Roll-ups Roll Out Their Plans

The centerpiece on the federal government’s holiday table may be the surprisingly fast pace of repayment of bailout funds by the big money-center banks.  There are also claims for job creation from spending the stimulus money, especially considering the initial jobs report for November showed only 11,000 jobs were eliminated in the month.  But inevitably (this is Washington DC after all) there are also charges of money slipping through the cracks and — uh-oh — disappearing.  And more than one boffin has noticed a cart-before-the-horse pattern to some stimulus programs.

The Rural Broadband stimulus package, for instance, is being administered by the RUS and the NTIA (Rural Utilities Service and National Telecommunications and Information Administration), neither of which has much experience with awarding big grants — and it may that neither of them has a MAP of which areas are underserved by current broadband suppliers.  If you can stand the boredom, there is a report by the Government Accountability Office (GAO) with the revealing title: “Agencies are Addressing Broadband Program Challenges, but Actions are Needed to Improve Implementation.”  (http://www.gao.gov/products/GAO-10-80).  Here is a take on the situation from The Industry Standard: http://www.thestandard.com/news/2009/12/02/groups-urge-changes-broadband-stimulus-programs?page=0%2C0

But however you look at it, there are some pretty interesting little companies in the  broadband services market, and some of them stand to find a bonanza in the RUS/NTIA sweepstakes.  It’s a fairly safe bet than any company in this sector has applied for some of the stimulus money, since there were reportedly $28 billion in requests for the $7.2 billion that was set aside by Congress.  I have read, but cannot say for sure, that there are 2,000 or more wireless broadband service providers in the US as I write this, which is why there are business plans popping up that want to “roll up” these small suppliers into a larger powerhouse company. 

Consider Rushville IN-based Omnicity Corp (OTCBB: OMCY; http://www.omnicity.net/), which is seeking to provide broadband services to rural users in the Midwest using wireless technologies.  OMCY announced last week that they have agreed to buy the assets of AAA Wireless, which will give them 39 wireless towers with “a footprint of 80,000 homes.”  OMCY says it has more than doubled its subscriber base in the last six months (they became public in February this year), and is on track to double again in the next six months.  It must be largely undiscovered if that is true, because the shares are trading at $0.30 vs a high of $0.95 on average volume of less than 40,000 shares a day.  But when you think about it, part of the problem of rural communities is that people seldom pay much attention to them, so it’s not a surprise that OMCY has a small audience, at least for now.

Or consider Reno NV-based Yonder Media* (http://www.yondermedia.com)  , which is currently private, but has signed an intent to merge with Salt Lake City-based Bayhill Capital Corp (OTCBB: BYHL) in what is commonly called a reverse merger (http://finance.yahoo.com/news/Yonder-Media-Architects-Merge-iw-3536792173.html?x=0&.v=1) .  What would happen is that Bayhill would be renamed Yonder Media, and the management of Yonder Media would take over the reins, including the current “affiliate marketing” operations of Bayhill’s Commission River subsidiary (http://commissionriver.com/) .  Together they have a run rate of about $3.5 million to $4.0 million.  BYHL shares are selling for $0.30, and it’s hard to say what the market cap is realistically, since in these reverse mergers, there is almost always a substantial “adjustment” to the ownership.  Yonder has a similar goal to Omnicity — but aims to cover more ground, serving 500-750 rural communities inside a few years from their current base in Nevada and California.  Management at Yonder are Silicon Valley vets with successes under their belts; the funding to date has come from the insiders, which is never a bad sign.  Of course the Yonder-Bayhill deal is contingent on several things, and there’s many a slip twixt the cup and the lip, so do your diligence, as you should on anything you buy, sell or trade.

The great city of Houston is home to Internet America Inc (OTCBB: GEEK; http://www.internetamerica.com/), which claims to have about 8,100 wireless subscribers, and has applied for ARRA stimulus funds to serve Southeast Texas.  They are making losses at present, at least partly because their older dial-up services are getting ditched as people move to better solutions, but they seem to be running at a revenue rate of close to $4.5 million annually, which does represent a year-over-year slight gain (http://finance.yahoo.com/news/Internet-America-Reports-bw-2418740372.html?x=0&.v=1) .  GEEK shares are changing hands at $0.32 today, vs a 52-week high of $0.52, for a market cap of a little over $5 million and almost negligible daily trading.  Their toll-free telephone is 1-800-BE-A-GEEK.  You gotta love that. 

Omaha NB-based KeyOn Communications Holdings (OTCBB: KEYO;  http://www.keyon.com/)  is probably the slickest of these rural broadband roll-up companies, which is not surprising since they are being packaged by a very slick and aggressively promotional PR firm.  KeyOn’s CEO announced this week the acquisition of a north-central Texas wireless broadband shop, SkyWi, which, according to the release dated December 7, will contribute $300,000 in annual revenues and $150,000 in EBITDA (http://finance.yahoo.com/news/KeyOn-Closes-First-bw-660239622.html?x=0&.v=1) .  If you can make 50% EBITDA margins, you probably will get asked to the Prom this spring, but one is tempted to say “Show Me.”  KEYO is trading today at $1.89, down from a 52-week high of $2.60, and in spite of all efforts to the contrary, average volume is still only about 30,000 shares per day, for a market cap of about $39 million, which by a rough count is about 5 times revenue.  KEYO has applied for $150 million in stimulus funding, by the way.

We do not recommend investments; please do your own diligence.

*Client of Allen & Caron, publisher of this blog.


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